Payday Loans: some of the most financially predatory loans out there, explained with our fictional friend Bobby

Bobby is a 20-year-old first-generation college student who works at a restaurant to pay his way through school and cover what his financial aid doesn't.

When he started high school, his parents started saving up for a computer for him.

Just recently, Bobby's roommate's cat destroyed his $1500 laptop that it took his parents so long to save for. He needs his own computer to do his coursework, so he can't wait for them to save enough money to buy another one for him: he needs to buy it himself.

Bobby is a computer science major, so he knows the importance of regular, thorough backups. That's not what this story is about; Bobby's data is all safe and can be completely recovered, despite the cat's shenanigans.

After paying for all his needs and forgoing all his wants, he has $720 to spare each month. Bobby doesn't have any savings of his own.

He needs the computer right away, so he believes his only option is to get approved for a payday loan, buy the computer, and pay off the loan with the surplus.

Bobby assumes that, at worst, it'll be like putting the computer on a credit card, which he figures charges about 30% annual interest, which he could pay off in 2 months. At best, he thinks, it'll be like a small, extra student loan, around 3-4% interest, on which he'll pay almost no interest during those same 2 months.

But Bobby made a critical mistake. Payday loans make even the interest charged by credit cards-- normally thought of as very high-- pale in comparison.

The actual terms of Bobby's loan, are that he'll in fact have to pay 659.5% annual interest.

Bobby does some quick math after reviewing the terms of the loan he was approved for in a matter of minutes, and he realizes the trouble he's now in.

He can afford to put $180 a week toward the laptop. It will take 8 weeks before at least $1 of that actually goes to paying off the $1500 principal he borrowed for the actual cost of the laptop. The other $179-and-a-bit from those first 8 payments is all interest. At this rate, it'll take him a year to pay off the laptop. Of that year, for almost 11 months, he'll pay a more significant fraction of his payment toward the interest than toward the cost of the laptop. After a year, Bobby will finally finish paying off the $1500 laptop. But let's step back for a minute: Over that year, Bobby will have made 52 weekly payments of $180, for a total of $9,360. But the laptop was only $1,500, so why $9,360?

That's exactly what makes payday loans so dangerous: remember, the interest rate was 659.5%, so for every $100 Bobby borrowed, if it took him a year to pay back, he'd owe the $100, plus $659.50 in interest-- he owes almost 7 times more in interest than he actually borrowed.

Let's look at 3 things to see just how predatory this process was to him:

1. The amortization table for the payday loan compounded every 2 weeks and a graph of how much principal and interest remain after each payment
2. The amortization table at 30%, about what he could've gotten from a credit card, and a graph of how much principal and interest remain after each payment
3. The amortization table at 3.5%, about what he could have gotten if he were taking out a federal student loan, and not buying a laptop, and a graph of how much principal and interest remain after each payment 

(This is, by the way, probably the only context I can think of that, relatively speaking, makes a 30% interest rate on a credit card balance seem "not as bad" in perspective)

Before we look at the graphs and tables, let's look at the numbers:

For each one, Bobby will pay $180 a week until he finishes.

Under the lowest interest rate (the "student-loan-ish" rate), if Bobby pays $173.64 a week-- remember, he has $180 a week for discretionary spending he can put towards this-- he'll be done in 2 months. If he actually pays $180, he'll be done a few days before. In 9 payments, Bobby will have paid 1.003 times the sticker price of the laptop.

Under the middle rate (the "credit-card-ish" rate), if Bobby pays $177.89 weekly, he'll be done in 2 months. Adding an extra $2.11 to his weekly payment will only speed things up by a little bit; he might be done a day early if anything changes. In 9 payments, Bobby will have paid 1.028 times the sticker price of the laptop.

Finally, the actual payday rate: if Bobby pays $180 weekly, he'll be done in a year. In 52 payments, Bobby will have paid 6.24 times the sticker price of the laptop.

Now, the graphs. 

First, the lowest rate:

	Beginning Balance	Interest	Principal	Ending Balance	Total Paid
1	$1,500.00	$1.01	$172.63	$1,327.37	$173.64
2	$1,327.37	$0.89	$172.75	$1,154.62	$347.28
3	$1,154.62	$0.78	$172.86	$981.76	$520.92
4	$981.76	$0.66	$172.98	$808.78	$694.56
5	$808.78	$0.54	$173.10	$635.68	$868.20
6	$635.68	$0.43	$173.21	$462.47	$1,041.84
7	$462.47	$0.31	$173.33	$289.14	$1,215.48
8	$289.14	$0.19	$173.45	$115.70	$1,389.12
9	$115.70	$0.08	$115.70	$0.00	$1,504.90

 Next, the middle rate:

	Beginning Balance	Interest	Principal	Ending Balance	Total Paid
1	$1,500.00	$8.57	$169.32	$1,330.68	$177.89
2	$1,330.68	$7.60	$170.29	$1,160.39	$355.78
3	$1,160.39	$6.63	$171.26	$989.13	$533.67
4	$989.13	$5.65	$172.24	$816.89	$711.56
5	$816.89	$4.67	$173.22	$643.67	$889.45
6	$643.67	$3.68	$174.21	$469.45	$1,067.34
7	$469.45	$2.68	$175.21	$294.24	$1,245.23
8	$294.24	$1.68	$176.21	$118.03	$1,423.12
9	$118.03	$0.67	$118.03	$0.00	$1,541.82

Finally, Bobby's actual rate:

	Beginning Balance	Interest	Principal	Ending Balance	Total Paid
1	$1,500.00	$179.50	$0.50	$1,499.50	$180.00
2	$1,499.50	$179.44	$0.56	$1,498.93	$360.00
3	$1,498.93	$179.37	$0.63	$1,498.30	$540.00
4	$1,498.30	$179.30	$0.71	$1,497.59	$720.01
5	$1,497.59	$179.21	$0.79	$1,496.80	$900.01
6	$1,496.80	$179.12	$0.89	$1,495.91	$1,080.02
7	$1,495.91	$179.01	$0.99	$1,494.92	$1,260.02
8	$1,494.92	$178.89	$1.11	$1,493.81	$1,440.02
9	$1,493.81	$178.76	$1.25	$1,492.56	$1,620.03
10	$1,492.56	$178.61	$1.39	$1,491.16	$1,800.03
11	$1,491.16	$178.44	$1.56	$1,489.60	$1,980.03
12	$1,489.60	$178.26	$1.75	$1,487.85	$2,160.04
13	$1,487.85	$178.05	$1.96	$1,485.90	$2,340.05
14	$1,485.90	$177.81	$2.19	$1,483.71	$2,520.05
15	$1,483.71	$177.55	$2.45	$1,481.25	$2,700.05
16	$1,481.25	$177.26	$2.75	$1,478.50	$2,880.06
17	$1,478.50	$176.93	$3.08	$1,475.43	$3,060.07
18	$1,475.43	$176.56	$3.44	$1,471.98	$3,240.07
19	$1,471.98	$176.15	$3.86	$1,468.12	$3,420.08
20	$1,468.12	$175.69	$4.32	$1,463.81	$3,600.09
21	$1,463.81	$175.17	$4.84	$1,458.97	$3,780.10
22	$1,458.97	$174.59	$5.41	$1,453.56	$3,960.10
23	$1,453.56	$173.94	$6.06	$1,447.49	$4,140.10
24	$1,447.49	$173.22	$6.79	$1,440.71	$4,320.11
25	$1,440.71	$172.40	$7.60	$1,433.11	$4,500.11
26	$1,433.11	$171.50	$8.51	$1,424.60	$4,680.12
27	$1,424.60	$170.48	$9.53	$1,415.07	$4,860.13
28	$1,415.07	$169.34	$10.67	$1,404.40	$5,040.14
29	$1,404.40	$168.06	$11.94	$1,392.46	$5,220.14
30	$1,392.46	$166.63	$13.37	$1,379.09	$5,400.14
31	$1,379.09	$165.03	$14.97	$1,364.11	$5,580.14
32	$1,364.11	$163.24	$16.77	$1,347.35	$5,760.15
33	$1,347.35	$161.23	$18.77	$1,328.57	$5,940.15
34	$1,328.57	$158.99	$21.02	$1,307.56	$6,120.16
35	$1,307.56	$156.47	$23.53	$1,284.02	$6,300.16
36	$1,284.02	$153.65	$26.35	$1,257.67	$6,480.16
37	$1,257.67	$150.50	$29.50	$1,228.17	$6,660.16
38	$1,228.17	$146.97	$33.03	$1,195.14	$6,840.16
39	$1,195.14	$143.02	$36.99	$1,158.15	$7,020.17
40	$1,158.15	$138.59	$41.41	$1,116.74	$7,200.17
41	$1,116.74	$133.64	$46.37	$1,070.37	$7,380.18
42	$1,070.37	$128.09	$51.92	$1,018.45	$7,560.19
43	$1,018.45	$121.88	$58.13	$960.33	$7,740.20
44	$960.33	$114.92	$65.09	$895.24	$7,920.21
45	$895.24	$107.13	$72.87	$822.37	$8,100.21
46	$822.37	$98.41	$81.59	$740.77	$8,280.21
47	$740.77	$88.65	$91.36	$649.41	$8,460.22
48	$649.41	$77.71	$102.29	$547.12	$8,640.22
49	$547.12	$65.47	$114.53	$432.59	$8,820.22
50	$432.59	$51.77	$128.24	$304.35	$9,000.23
51	$304.35	$36.42	$143.58	$160.77	$9,180.23
52	$160.77	$19.24	$160.77	$0.00	$9,360.24

This has been just as much a cautionary tale (again) about the effect of higher interest rates on the cost to a consumer to borrow that much money, as it has been a desperate plea to anyone reading, to pursue every other possible avenue before resorting to a payday loan, because the practices of the businesses that provide them are unethical, extortionary, immoral, and very often illegal, and are a near-certain path to inescapable financial ruin.